Ready to tackle the basics? The 1031 exchange, as it is commonly known, derives its name from the section of the Internal Revenue Code which explains the use of a tax deferred exchange. Through this code section, a taxpayer is allowed to defer capital gain tax on the sale and subsequent purchase of investment or business property if the transaction is structured correctly with the use of a qualified intermediary.
- A taxpayer will enter into an exchange agreement with the qualified intermediary who then works with the taxpayer to make sure the transactions are structured to meet all of the requirements of the IRS code.
- The 1031 exchange process needs to start prior to the sale of your relinquished property. The qualified intermediary works with your title company to make sure the sale of your property is handled correctly to accommodate your 1031 exchange. The intermediary will have some exchange documents for you to sign at closing. Then the proceeds from the sale of your property are sent directly to us, the qualified intermediary (the taxpayer cannot have constructive receipt of the proceeds or it will nullify the exchange). The proceeds are deposited into a bank for the benefit of the taxpayer where they will stay until the closing of any replacement property.
- The taxpayer will have 45 days from the date of closing on the sale (relinquished) property to identify any potential replacement properties they may want to purchase. The taxpayer has an additional 135 days to actually close on the purchase of the replacement properties. The intermediary will have some additional documents for the taxpayer to sign at the closing of the replacement properties. The intermediary will forward the necessary proceeds for the purchase of the replacement properties to the title company from your exchange account.